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The Asian panic

It happened in 1997, and some think it is happening again. Back in 1994 the US Federal Reserve upped interest rates, and so begun a cycle of tightening monetary policy. Money flowed from East to West, and in 1997 crisis was the watch word. The so called tiger economies of South East Asia in particular saw their economies look distinctly like a certain fruit – a pear. It was an important episode. Some say that the Asian crisis of 1997 sparked off a chain of events that led to the 2008 finance crisis. And now it seems to be happening all over again. Or is it?

Many economists say that the tragedy of the Asian crisis was that it was not the fault of the countries that were the victims. Cheap interest rates in the US meant money flowed from the US and Europe into South East Asia. Not all governments in the region wanted it. But – or so Nobel Laureate Joseph Stiglitz, who was chief economist at the World Bank at the time alleges – the IMF urged governments to welcome the influx of money. It is just that when money flows fast, not all of it is used wisely. Bubbles are born. Then in 1994 things began to change. Slowly the Fed increased rates. By 1997, the interest rates in the US were attractive to investors, and money flowed back. Bad Asian businesses were exposed. Good businesses were caught out too. The IMF came riding in to the rescue, but not all agreed with how it reacted. Critics say the IMF was more concerned about finding ways to ensure the West got its money back than helping the countries of South East Asia cope with the crisis.

And in so doing seeds were sown. Many countries in South East said never again, and vowed to ensure they were never again reliant on overseas capital. China watched events with alarm, and its policy of keeping a cheap yuan, and pushing for growth off a trade surplus was born. Many economists say this policy helped to contribute to global imbalances, which may have been an underlying cause of the 2008 crisis.

But by trying so hard to save the West, the IMF and –what Stligtz calls the Washington Consensus – western banks got off lightly, It happened again in 1998 with the Russian crisis and the collapse of LTCM, for which Fed Chairman Alan Greenspan managed to orchestrate a rescue which avoided a western banking crisis. But the rescue meant moral hazard because western banks did not learn their lesson. They repeated their errors until they became too big for even the Fed to sort them out in 2008.

Now let’s come up to date. We appear to be entering a new period of rising interest rates. The Fed and Bank of England have tried to persuade us that rates will not rise for some time, but the markets are not buying it. Every piece of good news, every

piece of okay news on jobs in the UK and the US, makes the markets more certain that rates will be rising sooner rather than later. On the back of this, yields on US government bonds have hit two year highs. It is not so much that money is flowing from Asia back into the US, but that the markets fear this will happen. And the fear is having an effect. The Indian Rupee fell to all-time low against the dollar yesterday (19 August). But emerging market currencies saw sharp falls across the board.

So far this year has been disastrous for the South African Rand, the Brazilian Real, and now the Indian Rupee. Last week data revealed that Russia is in recession. Yesterday data emerged indicating that Thailand is in recession. The Indonesian stock market saw sharp falls as markets took fright over the size of its current account deficit. Indonesian government debt is rising too. Yet there are reasons to think that some of these countries are being wrongly punished by the markets, and the ultimate loser will be the markets themselves.

This time around many of the larger countries of South East Asia are far less reliant on overseas money. Savings ratios are high.

In Indonesia the ratio of credit to GDP is 30 per cent, against an average of nearer 100 per cent for the region. More interestingly, in Indonesia a smaller proportion of credit has funded projects in the property sector, relative to Hong Kong and Vietnam, for example. As a result there is little hint of a property bubble in the making. Instead, much of the credit has funded infrastructure and manufacturing. In 1997 around 50 per cent of Indonesia’s credit was funded by foreign currencies. Today that level is nearer 15 per cent.

Indonesian domestic credit to the private sector is just 33 per cent, compared to 203 per cent in the US. The ratio is just 33 per cent in the Philippines too. It is even lower in Mexico, which may, by the way, benefit from re-shoring as manufacturers move closer to the US market.

As far as emerging markets are concerned, the markets are in panic mode. In such times they are lousy at picking the wheat from the chaff. When they become more rational, certain emerging market countries will see equities boom.